Moscow Cuts VAT for Domestic Flights to 10 Percent

06. April 2015

The Putin government has decided to sharply reduce value added tax on all flights operated within Russia. Alongside the granting of financial support for airlines it is another attempt to
relieve beleaguered carriers from costs and keep them in the air.

Most Russian airlines are financially not well off, to say the least, some like Utair even at the brink of bankruptcy. They are badly suffering from decreasing passenger numbers, the contracting
economy, a sharp decline of the travel market and reduced air freight consignments flown in the holds of most carriers. This rather gloomy situation is the price Russian carriers involuntarily
have to pay for their country’s international isolation and sanctions imposed by western countries as reaction to the illegal Crimea annexation and Moscow’s ongoing military support for the
separatists in the Eastern parts of the Ukraine.

Airline rescuer Putin
In a first reaction to the pressing financial needs of some local carriers, the Kremlin granted subsidies for lending rates as done in the case of UTair, for instance.

However, as Transaero points out, they received a major credit from Russian VTB Bank on general commercial market terms under state guarantees.

Now the second aid package seems to follow since demand for flights keeps on declining on both domestic and international routes, setting the airline’s alarm bells ringing. During a meeting with
civil aviation officials Vladimir Putin expressed his understanding for the difficult situation of the industry. On this occasion he indicated his full support for the zero VAT proposals asked
for by the airlines but noted that the issue still has to be examined by the Ministry of Finance.

Sukhoi’s SSJ100 / company courtesy

State support for ailing SSJ100
During the meeting the idea of granting state subsidies for airlines that would lease Sukhoi produced SuperJet 100, a 100-seat airliner, was also brought up. In case this proposal is approved
airlines chartering the poor selling SSJ100 can expect to be granted a 50 percent reduction of their leasing fees, with the government paying the difference to manufacturer Sukhoi.
Although the final decision on this matter is still pending Putin had indicated his support and it can be assumed that there won’t be much opposition to the plans. Both measures, the VAT project
and the sharply reduced leasing costs for Sukhoi’s regional jet, will help supporting both Russian airlines and aircraft producers. The flip side of the coin is that the Kremlin’s difficult
financial situation, mainly caused by sharply falling commodity prices, enormous military expenditures and the massive ruble devaluation will get even worse.